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Article by DailyStocks_admin    (10-23-08 07:35 AM)

White Mountains Insurance Group Ltd. CEO ALLAN LEWIS WATERS bought 1600 shares on 10-13-2008 at $330

BUSINESS OVERVIEW

GENERAL

White Mountains Insurance Group, Ltd. (the "Company" or the "Registrant") is an exempted Bermuda limited liability company whose principal businesses are conducted through its property and casualty insurance and reinsurance subsidiaries and affiliates. Within this report, the term "White Mountains" is used to refer to one or more entities within the consolidated organization, as the context requires. The Company's headquarters are located at Bank of Butterfield Building, 42 Reid Street, Hamilton, Bermuda HM 12, its principal executive office is located at 80 South Main Street, Hanover, New Hampshire 03755-2053 and its registered office is located at Clarendon House, 2 Church Street, Hamilton, Bermuda HM 11. White Mountains' reportable segments are OneBeacon, White Mountains Re, Esurance and Other Operations.

The OneBeacon segment consists of OneBeacon Insurance Group, Ltd. ("OneBeacon Ltd."), an exempted Bermuda limited liability company that owns a family of U.S.-based property and casualty insurance companies (collectively "OneBeacon"), substantially all of which operate in a multi-company pool. OneBeacon offers a wide range of specialty, commercial and personal products and services sold primarily through select independent agents and brokers. OneBeacon was acquired by White Mountains in 2001 from Aviva plc. ("Aviva"), formerly CGNU, (the "OneBeacon Acquisition"). During the fourth quarter of 2006, White Mountains sold 27.6 million, or 27.6%, of OneBeacon Ltd.'s common shares in an initial public offering (the "OneBeacon Offering"). As of December 31, 2007, White Mountains owned 72.9% of OneBeacon Ltd's outstanding common shares.

The White Mountains Re segment consists of White Mountains Re Ltd., an exempted Bermuda limited liability company, and its subsidiaries (collectively, "White Mountains Re"). White Mountains Re offers reinsurance capacity for property, casualty, accident & health, agriculture, aviation and space, and certain other exposures on a worldwide basis through its subsidiaries, Folksamerica Reinsurance Company ("Folksamerica"), Sirius International Insurance Corporation ("Sirius International") and White Mountains Re Bermuda Ltd. ("WMRe (Bermuda)", formerly Fund American Reinsurance Company, Ltd.). White Mountains Re also provides reinsurance advisory services, specializing primarily in property and other short-tailed lines of reinsurance, through White Mountains Re Underwriting Services Ltd. ("WMRUS"). During the third quarter of 2006, White Mountains Re sold one of its subsidiaries, Sirius America Insurance Company ("Sirius America"), to an investor group. As part of the transaction, White Mountains acquired an equity interest of approximately 18% in the acquiring entity, Lightyear Delos Acquisition Corp. ("Delos"), and accounts for Delos on the equity method within its Other Operations segment.

The Esurance segment consists of Esurance Holdings, Inc., and its subsidiaries (collectively, "Esurance"). Esurance sells personal auto insurance directly to customers online and through select online agents.

White Mountains' Other Operations segment consists of the Company and its intermediate holding companies, its wholly-owned investment management subsidiary, White Mountains Advisors LLC ("WM Advisors"), its weather risk management business ("Galileo"), its variable annuity reinsurance business, White Mountains Life Reinsurance (Bermuda) Ltd. ("WM Life Re"), as well as the International American Group, Inc. (the "International American Group") and various other entities not included in the other segments. The International American Group, consists of American Centennial Insurance Company ("American Centennial") and British Insurance Company of Cayman ("British Insurance Company"), both of which are in run-off. The Other Operations segment also includes White Mountains' investments in common shares and warrants to purchase common shares of Symetra Financial Corporation ("Symetra"), its investments in Delos and Pentelia Investment Ltd. ("Pentelia") and the consolidated results of the Tuckerman Capital, LP and Tuckerman Capital II, LP funds (the "Tuckerman Funds").

White Mountains' Operating Principles

White Mountains strives to operate within the spirit of four operating principles. These are:

Underwriting Comes First. An insurance enterprise must respect the fundamentals of insurance. There must be a realistic expectation of underwriting profit on all business written, and demonstrated fulfillment of that expectation over time, with focused attention to the loss ratio and to all the professional insurance disciplines of pricing, underwriting and claims management.

Maintain a Disciplined Balance Sheet. The first concern here is that insurance liabilities must always be fully recognized. Loss reserves and expense reserves must be solid before any other aspect of the business can be solid. Pricing, marketing and underwriting all depend on informed judgment of ultimate loss costs and that can be managed effectively only with a disciplined balance sheet.

Invest for Total Return. Historical insurance accounting has tended to hide unrealized gains and losses in the investment portfolio and over-reward reported investment income (interest and dividends). Regardless of the accounting, White Mountains must invest for the best growth in after-tax value over time. In addition to investing our bond portfolios for total after-tax return, that will also mean prudent investment in a balanced portfolio consistent with leverage and insurance risk considerations.

Think Like Owners. Thinking like owners has a value all its own. There are stakeholders in a business enterprise and doing good work requires more than this quarter's profit. But thinking like an owner embraces all that without losing the touchstone of a capitalist enterprise.

ONEBEACON

OneBeacon, whose United States headquarters is in Canton, Massachusetts, is a property and casualty insurance writer that provides a range of specialty insurance products as well as a variety of segmented commercial and personal insurance products. With roots dating back to 1831, OneBeacon has been placing business for more than 175 years through independent insurance agencies, its primary distribution channel. At December 31, 2007 and 2006, OneBeacon had $9.5 billion and $9.9 billion of total assets, respectively, and shareholder's equity of $1.9 billion and $1.8 billion, respectively. At December 31, 2007 and 2006, White Mountains recorded $517 million and $491 million of minority interest related to its ownership in OneBeacon. OneBeacon wrote approximately $1.9 billion and $2.0 billion in net written premiums in 2007 and 2006, respectively. As of February 28, 2008, OneBeacon's principal operating insurance subsidiaries are rated "A" (Excellent, the third highest of fifteen ratings) by A.M. Best and "A" (Strong, the sixth highest of twenty-one ratings) by Standard & Poor's, rating agencies that specialize in the insurance and reinsurance industry.

Property and Casualty Insurance Overview

Generally, property and casualty insurance companies write insurance policies in exchange for premiums paid by their customers (the insured). An insurance policy is a contract between the insurance company and the insured where the insurance company agrees to pay for losses suffered by the insured that are covered under the contract. Such contracts often are subject to subsequent legal interpretation by courts, legislative action and arbitration. Property insurance generally covers the financial consequences of accidental losses to the insured's property, such as a home and the personal property in it, or a business' building, inventory and equipment. Casualty insurance (often referred to as liability insurance) generally covers the financial consequences of a legal liability of an individual or an organization resulting from negligent acts and omissions causing bodily injury and/or property damage to a third party. Claims on property coverage generally are reported and settled in a relatively short period of time, whereas those on casualty coverage can take years, even decades, to settle.

Insurance companies derive substantially all of their revenues from earned premiums, investment income and net gains and losses from sales of investment securities. Earned premiums represent premiums received from insureds, which are recognized as revenue over the period of time that insurance coverage is provided (i.e., ratably over the life of the policy). A significant period of time normally elapses between the receipt of insurance premiums and the payment of insurance claims. During this time, investment income is generated, consisting primarily of interest earned on fixed maturity investments and dividends earned on equity securities. Net realized investment gains and losses result from sales of securities from the insurance companies' investment portfolios.

Insurance companies incur a significant amount of their total expenses from policyholder losses, which are commonly referred to as "claims". In settling policyholder losses, various loss adjustment expenses ("LAE") are incurred, such as insurance adjusters' fees and litigation expenses. In addition, insurance companies incur policy acquisition expenses, such as commissions paid to agents and premium taxes, and other expenses related to the underwriting process, including compensation and benefits for professional and clerical staff.

The key measure of relative underwriting performance for an insurance company is the combined ratio. An insurance company's combined ratio under accounting principles generally accepted in the United States ("GAAP") is calculated by adding the ratio of incurred loss and LAE to earned premiums (the "loss and LAE ratio") and the ratio of policy acquisition and other underwriting expenses to earned premiums (the "expense ratio"). A combined ratio under 100% indicates that an insurance company is generating an underwriting profit. However, when considering investment income and investment gains or losses, insurance companies operating at a combined ratio of greater than 100% can be profitable.

Lines of Business

OneBeacon's business is managed through three major underwriting units: specialty lines, commercial lines and personal lines. OneBeacon's specialty lines businesses are national in scope, while its commercial and personal lines businesses have been concentrated primarily in the Northeastern United States.

Specialty lines

OneBeacon's specialty lines underwriting unit is a collection of niche businesses that focus on solving the unique needs of particular customer groups on a national scale. Each of these businesses maintains stand-alone operations and distribution channels targeting their specific customer groups. OneBeacon provides distinct products and offers tailored coverages and services, managed by teams of market specialists. OneBeacon's specialty businesses include:

•
OneBeacon Professional Partners ("OBPP"): Formed in 2002, OBPP is a provider of specialty liability products primarily focused on the health-care industry. Additional products include media liability and lawyers' professional liability insurance. OBPP's health-care products include hospital professional liability ("HPL"), long-term care liability, ("LTC"), HMO reinsurance, providers excess insurance and managed care errors and omissions, ("MCE&O"). HPL, LTC and MCE&O protect against claims for negligence arising from direct patient treatment, such as diagnoses, rendering opinions or referrals, and coverage for professional committee activities. HMO reinsurance and provider excess insurance are financial products designed to protect capitated providers or facilities from catastrophic medical events. In 2005, OBPP broadened its capabilities through two acquisitions and the formation of a new business. First Media Insurance Specialists, Inc. was acquired to distribute OBPP's new product line of primary and excess media liability coverages targeting small-to-midsized media companies, which include publishers, broadcasters and authors. OBPP also acquired the renewal rights to the HPL and MCE&O business of Chubb Specialty Insurance. Additional net written premiums from both transactions totaled $38 million in both 2007 and 2006. In November 2005, OBPP began offering lawyers' professional liability coverage targeting law firms employing fewer than 150 attorneys.

•
International Marine Underwriters ("IMU"): A leading provider of marine insurance, this business traces its roots back to the early 1900s. The IMU acquisition from Crum & Forster in the early 1990s doubled the company's book of marine business. IMU coverages include physical damage or loss, and general liability for cargo and commercial hull, both at primary and excess levels, marinas, including a "package" product (comprehensive property and liability coverage), and yachts (the offerings for which were strengthened by IMU's acquisition in October 2006 of yacht-specialist National Marine Underwriters, Inc., a yacht insurance managing general agency). IMU does not offer offshore energy products. Target customers include ferry operators and charter boats (hull), marina operators and boat dealers (package product) and private-pleasure yachts with hull values of less than $1 million.

•
A.W.G. Dewar ("Dewar"): A provider of tuition reimbursement insurance since 1930, Dewar's product protects both schools and parents from the financial consequences of a student's withdrawal or dismissal from school. The tuition refund plan reimburses parents up to 100% of tuition, room and board fees when a student is obliged to leave school due to covered reasons, such as medical or expulsion. Dewar provides customized policies to independent schools and colleges in North America.

•
Specialty Accident & Health ("A&H"): Formed in November 2006, this group provides accident insurance coverages to large employers (generally Fortune 1000 companies) on a group basis. Product coverages include corporate accident, travel accident and occupational accident coverage primarily targeted to the trucking industry. This group conducts business through independent agents and brokers and selectively markets directly to customers.

•
Government Risk Solutions ("GRS"): Formed in March 2007, this group offers property and casualty products for government entities. The products include automobile, property, general liability and professional liability coverages. The professional liability offerings consist of law enforcement, public officials and employment practice coverages. Markets served include cities/towns/townships, counties, transit authorities, government agencies, pools (groups of public entities) and special districts. GRS strategically distributes its products through agents and brokers.

OneBeacon offered additional rural and farm related products through National Farmers Union Property and Casualty Company ("NFU") until its sale on September 30, 2005 and commercial farm and ranch and commercial agricultural products through its Agri division until the sale of the renewal rights of its policies on September 29, 2006. Commercial lines

OneBeacon provides insurance solutions for middle market and small businesses through products that target particular industry groups with customized coverages and services. OneBeacon has begun to expand selectively into new geographic territories that align well with OneBeacon's approach to target specific customer segments.

OneBeacon's middle market accounts typically produce annualized gross premiums ranging from $25,000 to $1,000,000 and principally purchase "package" policies (combination policies offering property and liability coverage). OneBeacon targets 14 distinct customer groups including technology, financial institutions, professional services, wholesalers, metalworkers and commercial real estate, among others. OneBeacon also produces some standard commercial business that is not targeted to a specific industry group. By partnering with its specialty lines businesses, OneBeacon's middle market commercial lines business can deliver a seamless, comprehensive insurance solution. OneBeacon has also formed strategic partnerships with specialized insurance agencies to offer OneBeacon coverage to targeted customer groups such as technology companies and community banks.

Included in the middle market division of OneBeacon is OneBeacon Specialty Property ("OBSP"). Formed in 2004, OBSP provides excess property coverage against certain damages over and above those covered by primary policies or a large self-insured retention. Target classes include apartments and condominiums, commercial real estate, small-to-medium manufacturing, retail/wholesale and public entity and educational institutions. OBSP has a preference for principally low catastrophe-exposed risks. However, OBSP is exposed to large catastrophes, like Hurricane Katrina, that may cause losses to insured property in excess of its policies' attachment points. OBSP manages its catastrophic wind, earthquake and terrorism risks within the OneBeacon catastrophe management programs, including individual risk and portfolio-loss modeling and reinsurance protection. OneBeacon's excess property solutions are provided primarily through surplus lines wholesalers in all 50 states and the District of Columbia.

OneBeacon also markets package, automobile, workers compensation and umbrella coverage to small businesses, which typically generate annualized premiums ranging from $500 to $25,000. OneBeacon targets 14 industry groups as well as some association and group businesses with products that provide a highly competitive solution for select agents. OneBeacon's small-business growth strategy is to target insurance networks of suburban and rural agents who represent a strong customer base in those areas. OneBeacon's proprietary web platform has expedited underwriting at the point of sale, which has enabled growth in new territories while limiting the need for much incremental infrastructure. In the first quarter of 2006, OneBeacon introduced a small business service center to handle customer administration for enrolled agents.

OneBeacon's commercial lines products include:

•
Package: consists of combination policies offering property and liability coverage.

•
Automobile: consists of physical damage and liability coverage. Automobile physical damage insurance covers loss or damage to vehicles from collision, vandalism, fire, theft or other causes. Automobile liability insurance covers bodily injury of others, damage to their property and costs of legal defense resulting from a collision caused by the insured.

•
Multi-peril: consists of a package policy sold to small to mid-sized insureds or to members of trade associations or other groups that includes general liability insurance and commercial property insurance.

•
Workers compensation: covers an employer's liability for injuries, disability or death of employees, without regard to fault, as prescribed by state workers compensation law and other statutes.

•
Excess and surplus property: provides excess property coverage against certain damages over and above those covered by primary policies or a large self-insured retention.

•
Umbrella: supplements existing insurance policies by covering losses from a broad range of insurance risks in excess of coverage provided by the primary insurance policy up to a specified limit.

•
Inland marine: covers property that may be in transit or held by a bailee at a fixed location, movable goods that are often stored at different locations or property with an unusual antique or collector's value.

•
Property: covers losses to a business' premises, inventory and equipment as a result of weather, fire, theft and other causes.

•
General liability: covers businesses for any liability resulting from bodily injury and property damage arising from its general business operations, accidents on its premises and the products it manufactures or sells.

For the years ended December 31, 2007, 2006 and 2005, commercial lines net written premiums were as follows:

Personal lines

OneBeacon's personal lines underwriting unit provides homeowners insurance, segmented private passenger automobile and package policies (package products are combination policies offering home and automobile coverage with optional umbrella, boatowners and other coverages) sold through select independent agents. OneBeacon refers to this business, management services provided to reciprocal insurance exchanges and the consolidation of reciprocal insurance exchanges described below, as traditional personal lines.

In 2004, OneBeacon created a highly segmented product suite, called OneChoice, under which it is able to offer the appropriate risk-adjusted product and pricing to its customers. OneChoice is a multi-tiered product suite that enables OneBeacon to offer a broader range of coverages to a full spectrum of customers through more sophisticated pricing models that have a greater statistical correlation between historical loss experience and price than traditional pricing models. This product suite offers both automobile and homeowners coverages as well as package policies. OneChoice products rely on multiple, objective pricing tiers and rules-based underwriting that enable agents to offer OneBeacon solutions to a broad array of its customers and increase OneBeacon's market penetration. OneBeacon

regularly refines its product features and rating plans to optimize target market production. Ease of use is a critical aspect of this business. Agents can access OneChoice through either OneBeacon's proprietary agent portal or through comparative rating engines. The availability of multiple channels to access OneBeacon's product offerings provides increased opportunities for new business.

Within OneBeacon's personal lines underwriting unit, OneBeacon also provides management services for a fee to three reciprocal insurance exchanges ("reciprocals") that OneBeacon has created and capitalized by lending the reciprocals funds in exchange for surplus notes. Reciprocals are not-for-profit, policyholder-owned insurance carriers organized as unincorporated associations. As required by GAAP, White Mountains' consolidated financial statements reflect the consolidation of these reciprocals (See Note 18 —" Variable Interest Entities ").

OneBeacon's personal lines products include:

•
Automobile: consists of physical damage and liability coverage. Automobile physical damage insurance covers loss or damage to vehicles from collision, vandalism, fire, theft or other causes. Automobile liability insurance covers bodily injury of others, damage to their property and costs of legal defense resulting from a collision caused by the insured.

•
Homeowners: covers losses to an insured's home, including its contents, as a result of weather, fire, theft and other causes and losses resulting from liability for acts of negligence by the insured or the insured's immediate family. OneBeacon also offers identity theft resolution assistance and identity theft expense reimbursement coverage as part of its homeowners policies.

•
Package: consists of customized combination policies offering home and automobile coverage with optional umbrella and boatowners coverage.

OneBeacon's personal lines underwriting unit also includes AutoOne Insurance ("AutoOne"). Formed in 2001, AutoOne is a market leader in "assigned risk" business in New York. Assigned risk plans provide automobile insurance for individuals unable to secure coverage in the voluntary market. Insurance carriers are obliged to accept future assignments from state assigned risk pools as a condition of maintaining a license to write automobile business in the state. However, carriers may satisfy their assigned risk obligation by transferring their assignments to another insurer or by utilizing various "credits" (i.e. take-out, territorial and youthful driver credits). AutoOne offers services known as Limited Assigned Distribution, or LAD, and Commercial Limited Assigned Distribution, or CLAD, and credit programs to insurance carriers. While AutoOne was able to expand its product offerings to an additional 12 states in 2006, its overall volume of business decreased due to a significant decrease in the involuntary market in New York and New Jersey, where the majority of AutoOne's assigned risk business is generated. AutoOne now provides 28 LAD and CLAD programs in 22 states where assigned risk obligations may be assumed by a servicing carrier under a negotiated fee arrangement.

AutoOne also writes "voluntary take-out business" (policies "taken out" of the assigned risk pool and written in the voluntary market) by selecting policies from the assigned risk business it manages for its clients and from select insurance brokers to replace its clients assigned risk policy with an AutoOne policy. AutoOne receives credits for all policies taken out of the assigned risk plan which it can use either to reduce its future assigned risk obligations, or to sell to other carriers that can use the credits to reduce their own quota obligations. In 2007, AutoOne wrote more take-out business than all other carriers in New York combined and all of its take-out credits were sold to other carriers or used internally to reduce OneBeacon's own assigned risk quota obligation.

Marketing

OneBeacon offers its products through a network comprised of independent insurance agents, regional and national brokers and wholesalers. OneBeacon's distribution relationships consist of approximately 2,840 select agencies and brokers. No agency or broker produced more than 3% of OneBeacon's direct written premiums during 2007.

OneBeacon's specialty lines businesses are managed from locations logistically appropriate to their target markets. OBPP is based in Avon, Connecticut and distributes its products through select national and regional brokers and agents. IMU is headquartered in New York City and operates through nine branch locations throughout the United States. Its products are distributed through a network of select agents that specialize in marine business. Dewar's affiliate, A.W.G. Dewar Agency, which is headquartered in Quincy, Massachusetts, distributes tuition refund products to independent schools and colleges throughout North America. A&H conducts business through independent agents and brokers and selectively markets directly to customers. GRS distributes its products through agents and brokers.

The majority of OneBeacon's commercial and personal lines products are distributed through select independent insurance agents. OneBeacon protects the integrity of its franchise value by selectively appointing agents that demonstrate business and geographic profiles that align with its target markets and specialized capabilities. OneBeacon believes that independent insurance agents add value because they conduct more complete assessments of their clients' needs, which in turn results in more appropriate coverages and prudent risk management. OneBeacon also believes that independent agents will continue to be a significant force in overall industry premium production including the facilitation of cross-selling of specialty, commercial and personal business products. OneBeacon's commercial lines middle-market business, OBSP, provides its excess property solutions primarily through surplus lines wholesalers. In New York, AutoOne personal lines business generates take-out credits by writing policies from select insurance brokers that were previously in the New York Automobile Insurance Plan, or NYAIP. AutoOne sells these credits to insurance companies subject to NYAIP assignments. AutoOne markets its LAD and CLAD services and New York take-out credits directly to insurance carriers seeking assigned risk solutions.

Each year, OneBeacon designates its top performing agencies as "Lighthouse Partners", a program designed to strengthen these priority relationships and build those books of business. This program was introduced in the second quarter of 2006 and provides enhanced benefits such as priority account handling, access to OneBeacon's entire franchise of products, preferred profit-sharing opportunities, and priority access to OneBeacon's producer development school and co-op advertising program. There were 95 agencies that achieved this designation in 2007. OneBeacon's Lighthouse Partners represent fewer than 3% of OneBeacon's agencies but write approximately 20% of OneBeacon's business and over 20% of OneBeacon's new business. OneBeacon believes that its Lighthouse Partners are the core of its distribution and marketing system and that this deeper mutual commitment will benefit both these agencies and OneBeacon.

CEO BACKGROUND

Raymond Barrette has served as Chairman and CEO of the Company since January 2007 and has been a director since August 2006. He previously served as a director of the Company from 2000 to 2005, as President and CEO of the Company from 2003 to 2005, as CEO of OneBeacon from 2001 to 2002, as President of the Company from 2000 to 2001 and as Executive Vice President and Chief Financial Officer of the Company from 1997 to 2000. Prior to joining the Company in 1997, Mr. Barrette had 23 years of experience in the insurance business, mostly at Fireman’s Fund Insurance Company. Mr. Barrette is also Chairman of White Mountains Re and Esurance and a director of OneBeacon. See “Transactions With Related Persons, Promoters and Certain Control Persons.”



Yves Brouillette was appointed to the Board in August 2007. He has been the President of Beluca Investment, Inc. since 2005. Previously, Mr. Brouillette served in many leadership positions at ING companies including most recently as the CEO for ING Latin America operations in Mexico, Brazil, Chile and Peru from 2002 to 2005. Mr. Brouillette is a Director of ING Canada and was Chairman of the Board from 2003 to 2007. He joined ING in 1989. Mr Brouillette has over 30 years experience in the property and casualty insurance industry.



George J. Gillespie, III has been a director of the Company since 1986 and served as the Company’s Chairman from 2003 to May 2006. Mr. Gillespie serves as Special Counsel to the law firm of Cravath, Swaine & Moore LLP (“CS&M”) and was a partner of CS&M from 1963 to 2005. Mr. Gillespie’s son, John Gillespie, is also a director of the Company. See “Transactions With Related Persons, Promoters and Certain Control Persons.”



John D. Gillespie has been a director of the Company since 1999. Mr. Gillespie is the founder and Managing Member of Prospector Partners, LLC (“Prospector”). Mr. Gillespie served as Chairman and President of WM Advisors from 2003 to 2005 and as a Managing Director of OneBeacon from 2001 to 2003. Prior to forming Prospector, Mr. Gillespie was President of the T. Rowe Price Growth Stock Fund and the New Age Media Fund, Inc. Mr. Gillespie’s father, George Gillespie, is also a director of the Company. See “Transactions With Related Persons, Promoters and Certain Control Persons.”

Howard L. Clark, Jr. was a director of the Company from 1986 to 1990, an advisor to the Board from 1990 to 1993, and was re-elected as a director in 1993. Mr. Clark has served as Vice Chairman of Lehman Brothers, Inc. (“Lehman”) since 1993 and served as Chairman and CEO of Shearson Lehman Brothers, Inc. from 1990 to 1993. Prior to joining Shearson Lehman Brothers, Inc., Mr. Clark was Executive Vice President and Chief Financial Officer of the American Express Company. He is also a director of United Rentals, Inc., Walter Industries, Inc. and Mueller Water Products, Inc. See “Transactions With Related Persons, Promoters and Certain Control Persons.”



Robert P. Cochran has been a director of the Company since 1994 and serves as its Deputy Chairman. Mr. Cochran is a founding principal of Financial Security Assurance Holdings, Ltd. (“FSA”) and has served as FSA’s CEO since 1990 and as its Chairman and CEO since 1997. He is also Chairman of Financial Security Assurance Inc. and Financial Security Assurance (U.K.) Ltd.



A. Michael Frinquelli has been a director of the Company since June 2005. Mr. Frinquelli is co-founder and Manager of Renaissance Fund Advisors, Inc. Until 2004, Mr. Frinquelli was a general partner of Renaissance Executive Partners, which he co-founded in April 1997. Prior to that, he was a managing director at Merrill Lynch and a managing director at Salomon Brothers.



Allan L. Waters was appointed President and CEO of White Mountains Re in March 2007. He served as a director of the Company from 2003 to 2004 and was re-elected a director in November 2005. Mr. Waters was the founder and Managing Member of Mulherrin Capital Advisors, LLC, which he managed from 1998 to 2007. Mr. Waters formerly served as Senior Vice President and Chief Financial Officer of the Company from 1993 to 1997, as Vice President and Controller from 1990 to 1993, as Vice President of Finance from 1987 to 1990 and as Assistant Vice President of Finance from 1985 to 1987. See “Transactions With Related Persons, Promoters and Certain Control Persons.”

Bruce R. Berkowitz has been a director of the Company since 2004. Mr. Berkowitz is the founder and Managing Member of Fairholme Capital Management, LLC (“Fairholme”), a registered investment adviser, and is President and Director of Fairholme Funds, Inc. Prior to founding Fairholme in 1997, Mr. Berkowitz was a portfolio manager at Smith Barney, Inc. and Lehman Brothers Holdings, Inc. Mr. Berkowitz also serves as a director of Winthrop Realty Trust and TAL International Group, Inc. See “Transactions With Related Persons, Promoters and Certain Control Persons.”



Morgan W. Davis was appointed as a director in November 2006. Mr. Davis serves as a director and President of American Centennial Insurance Company (“ACIC”), a wholly-owned subsidiary of the Company. Mr. Davis was formerly a Managing Director of OneBeacon from 2001 to 2005 and served in a variety of capacities for White Mountains from 1994 to 2001. Prior to joining the Company in 1994, Mr. Davis had 21 years of experience in the insurance business, mostly at Fireman’s Fund Insurance Company and INA/Cigna. Mr. Davis also serves as a director of OneBeacon, Esurance and Montpelier Re Holdings, Ltd. See “Transactions With Related Persons, Promoters and Certain Control Persons.”



Edith E. Holiday has been a director of the Company since 2004. Ms. Holiday formerly served as Operating Trustee for TWE Holdings I and II Trusts from 2002 to 2007. Ms. Holiday formerly served as Assistant to the President of the United States and Secretary of the Cabinet from 1990 to 1993 and as General Counsel to the United States Treasury Department from 1989 to 1990. She is also a director of Hess Corporation, Canadian National Railway Company, H. J. Heinz Company and RTI International Metals, Inc. and is a director or trustee of 42 investment companies in the Franklin Templeton Group of Mutual Funds.



Lowndes A. Smith has been a director of the Company since 2003. Mr. Smith serves as Managing Partner of Whittington Gray Associates. Mr. Smith formerly served as Vice Chairman of The Hartford Financial Services Group, Inc., (“The Hartford”) and President and CEO of Hartford Life Insurance Company. He joined The Hartford in 1968. Mr. Smith also serves as Chairman of OneBeacon and is a director of 85 investment companies in the mutual funds of The Hartford.

MANAGEMENT DISCUSSION FROM LATEST 10K

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 and 2005

Overview

White Mountains ended 2007 with a fully diluted tangible book value per common share of $444, which represented an increase of 11.4% (including dividends) over the fully diluted tangible book value per common share of $406 as of December 31, 2006. This increase reflects favorable weather conditions and strong investment results in 2007. Fully diluted tangible book value per share at December 31, 2007 was reduced by $2 from the impact of share repurchases during the fourth quarter of 2007.

White Mountains ended 2006 with a fully diluted tangible book value per common share of $406, which represented an increase of 21% (including dividends) over the fully diluted tangible book value per common share of $343 as of December 31, 2005. This increase reflected favorable weather conditions and strong investment results when compared to 2005. Additionally, during the fourth quarter of 2006, White Mountains recognized an after-tax gain of $171 million, or $16 per common share, from the OneBeacon Offering.

Fully Diluted Tangible Book Value Per Share

Consolidated Results—Year Ended December 31, 2007 versus Year Ended December 31, 2006

White Mountains reported adjusted comprehensive net income of $481 million for 2007, compared to $734 million in 2006. Net income was $407 million in 2007, compared to $673 million in 2006. These results reflect favorable weather conditions and strong investment results in both years. During 2006, White Mountains benefited from an after-tax gain of $171 million from the OneBeacon Offering, an after-tax gain of $21 million on the purchase of Mutual Service, $29 million in after-tax transaction gains from the sales of Sirius America and OneBeacon's Agri business and $33 million in gains from the settlements of United States Federal and state income tax audits.

White Mountains' total revenues decreased by 1% to $4,734 million in 2007 compared to $4,794 million in 2006, mainly due to the $171 million gain from the OneBeacon Offering in 2006 and a $48 million decrease in other revenues, mainly at White Mountains Re. These revenue decreases were partially offset by a $98 million increase in net investment income, due mainly to a higher invested asset base in 2007, and a 2% increase in earned premiums. The increase in earned premiums was primarily due to an increase at Esurance, partially offset by decreases at OneBeacon and White Mountains Re.

White Mountains' total expenses were relatively flat at $4,052 million for 2007 when compared to 2006. Interest expense on debt increased 46% in 2007, primarily due to interest on the WMRe Senior Notes that were issued in March of 2007. This was partially offset by an 8% decrease in general and administrative expenses, due primarily to lower incentive compensation expense in 2007.

Consolidated Results—Year Ended December 31, 2006 versus Year Ended December 31, 2005

White Mountains reported adjusted comprehensive net income of $734 million for 2006, compared to $68 million in 2005. Net income was $673 million in 2006, compared to $290 million in 2005. The increase in 2006 adjusted comprehensive net income resulted primarily from the $171 million gain from the OneBeacon Offering, favorable weather conditions, strong investment returns and a $21 million after-tax gain on the purchase of Mutual Service. In addition, the 2005 results included $288 million in after-tax losses from hurricanes Katrina, Rita and Wilma, while 2006 included $70 million in after-tax losses from adverse development on those storms and a $95 million after-tax loss from the Olympus reimbursement (see description on page 58). 2005 also included $104 million of after-tax comprehensive net loss from the Montpelier Re investment, compared to $10 million in after-tax comprehensive net income in 2006. Adjusted comprehensive net income for 2006 also benefitted from $59 million of after-tax unrealized foreign currency gains, compared to $70 million of after-tax unrealized foreign currency losses in 2005, primarily from currency fluctuations of the U.S. dollar against the Swedish Krona and the Euro.

White Mountains' total revenues increased by 4% to $4,794 million in 2006 compared to $4,632 million in 2005, mainly due to the $171 million gain on the sale of OneBeacon shares and a $160 million increase in net realized investment gains, primarily due to $165 million of pre-tax losses in the value of the Company's investment in Montpelier Re realized during 2005, compared to a $5 million pre-tax gain realized in 2006. These increases were partially offset by a $56 million decrease in net investment income, primarily due to the receipt in 2005 of a $74 million special dividend from Montpelier Re, and a 2% decrease in earned premiums, primarily due to decreases at OneBeacon and White Mountains Re, which were partially offset by an increase at Esurance.

White Mountains' total expenses decreased by 6% to $4,064 million for 2006, primarily due to a $406 million decrease in losses and LAE, partially offset by a $70 million increase in general and administrative expenses. The decrease in losses and LAE was due mainly to lower catastrophe losses in 2006 compared to 2005. In 2005, White Mountains reported $422 million in pre-tax loss and LAE on hurricanes Katrina, Rita and Wilma, compared to $106 million in loss and LAE from adverse development on those storms, as well as a $137 million loss and $9 million in forgone override commissions from the Olympus reimbursement in 2006. The increase in general and administrative expenses in 2006 when compared to 2005 was primarily due to increased incentive compensation expenses.

Income Taxes

The Company is domiciled in Bermuda and has subsidiaries domiciled in several countries. The majority of the Company's worldwide operations are taxed in the United States. Income earned or losses incurred by non-U.S. companies will generally be subject to an overall effective tax rate lower than that imposed by the United States.

The income tax provision related to pretax earnings for 2007, 2006 and 2005 represents an effective tax rate of 30.9%, 13.6% and 12.0%, respectively. White Mountains' effective tax rates for 2007, 2006 and 2005 were lower than the U.S. statutory rate of 35% due primarily to income generated in jurisdictions other than the United States. In addition, White Mountains' effective tax rate for 2006 reflected tax benefits related to settlements of U.S. Federal income tax audits for years 2001 and 2002.

I. Summary of Operations By Segment

White Mountains conducts its operations through four segments: (1) OneBeacon, (2) White Mountains Re, (3) Esurance and (4) Other Operations. White Mountains manages the majority of its investments through its wholly-owned subsidiary, WM Advisors, therefore, a discussion of White Mountains' consolidated investment operations is included after the discussion of operations by segment. White Mountains' segment information is presented in Note 16—"Segment Information" to the Consolidated Financial Statements.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007



Overview



White Mountains ended the second quarter of 2008 with an adjusted book value per share of $444, which was essentially flat for the three and six months ended June 30, 2008, and an increase of 6% for the twelve months ended June 30, 2008, including dividends. White Mountains reported an adjusted comprehensive net loss of $17 million for both the three and six months ended June 30, 2008, compared to adjusted comprehensive net income of $90 million and $193 million in the same periods of 2007.



OneBeacon reported a combined ratio of 94% and 97% for the three and six months ended June 30, 2008 compared to 97% in both the three and six months ended June 30, 2007. White Mountains Re reported a combined ratio of 114% and 104% for the three and six months ended June 30, 2008, compared to 90% and 95% in the three and six months ended June 30, 2007. These increases were primarily due to $55 million of net adverse development recorded by White Mountains Re in the second quarter of 2008 resulting from a comprehensive review of its loss and LAE reserves (see Summary of Operations by Segment below for further discussion) . Esurance reported a combined ratio of 105% and 109% in the three and six months ended June 30, 2008 compared to 113% and 112% in the three and six months ended June 30, 2007. White Mountains’ GAAP pre-tax total return on invested assets was 0.4% and 0.9% for the three and six months ended June 30, 2008 compared to 1.6% and 3.5% for the three and six months ended June 30, 2007.



Total net written premiums were down slightly to $943 million and $1,958 million for the three and six months ended June 30, 2008, compared to $950 million and $2,001 million in the 2007 periods, as increases at OneBeacon and Esurance were more than offset by decreases at White Mountains Re. OneBeacon’s net written premiums were $530 million for the quarter and $955 million for the first six months, an increase of 9% and 3% from the comparable periods of 2007. The increase for both periods was driven by premiums from its new collector car and boat business. White Mountains Re’s net written premiums were $215 million for the quarter and $575 million for the first six months of 2008, a decrease of 23% and 16% from the comparable periods of 2007. These decreases occurred in almost every line of business, especially in casualty, and were primarily due to pricing, terms and conditions for certain accounts that no longer met White Mountains Re’s underwriting guidelines. Esurance’s net written premiums increased by 6% and 9% for the second quarter and first six months of 2008, to $198 million and $428 million, respectively, when compared to the same periods in 2007. Esurance’s growth rate has slowed as it has reduced marketing expenditures and increased pricing over the first six months of 2008.

Adjusted Book Value Per Share



White Mountains has changed its principal financial reporting measure from “fully diluted tangible book value per share” to “adjusted book value per share”. The difference between the two measures is that adjusted book value per share includes unamortized intangible assets, while fully diluted tangible book value per share does not. The Company determined adjusted book value per share to be a better financial reporting measure than fully diluted tangible book value per share principally because it includes the value of future commissions on acquired business in force from its 69% investment in AFI, which was first recorded as an intangible asset during the second quarter of 2008 and totaled $49 million as of June 30, 2008. Adjusted book value per share is a non-GAAP financial measure and has been presented retroactively for all periods herein. (See NON-GAAP FINANCIAL MEASURES on page 51).



Consolidated Results –Three and Six Months Ended June 30, 2008 versus Three and Six Months Ended June 30, 2007



White Mountains reported comprehensive net losses of $56 million and $77 million for the three and six months ended June 30, 2008, compared to comprehensive net income of $50 million and $159 million in the same periods of 2007. Effective January 1, 2008, White Mountains adopted FAS 159 and elected to record the changes in unrealized gains and losses from nearly all of its investment portfolio in net income. In prior periods, these changes have been included in other comprehensive income. Accordingly, net income (loss) and pre-tax income (loss) for 2008 periods are not directly comparable to such measures for 2007 periods.

White Mountains’ total revenues decreased by 14% and 17% to $1,039 million and $1,977 million for the three and six months ended June 30, 2008, compared to $1,211 million and $2,377 million in the 2007 periods. Earned premiums decreased by 4% and 3% during the second quarter and first six months of 2008 when compared to the same periods in 2007, as earned premium decreases at OneBeacon and White Mountains Re were partially offset by increases at Esurance over both periods. Net investment income decreased by 12% and 7% during the second quarter and first six months of 2008 when compared to the same periods in 2007. Net realized investment gains decreased by $94 million and $181 million during the second quarter and first six months of 2008 when compared to the same periods in 2007. White Mountains reported $54 million and $159 million of net unrealized losses through net income in the second quarter and first six months of 2008 as a result of the FAS 159 election, compared to $49 million and $24 million of net unrealized investment losses reported in other comprehensive income in same periods of 2007 (see Summary of Investment Results below). Other revenues increased $31 million to $65 million in the second quarter of 2008 compared to the second quarter of 2007, due mainly to $12 million of revenue from AFI and $10 million of gains in WM Life Re reported in the second quarter of 2008. Other revenues increased $5 million to $75 million in the first six months of 2008, compared to the 2007 period, as the revenue from AFI was offset by $5 million of losses in WM Life Re included in other revenues for the first six months of 2008.



White Mountains’ total expenses were essentially flat at $1,038 million and $2,080 million in the second quarter and first six months of 2008 when compared to the 2007 periods. Loss and LAE increased by $41 million to $633 million in the second quarter of 2008 and increased $66 million to $1,271 million in the first six months of 2008, due primarily to increased loss and LAE ratios at White Mountains Re. These increases were slightly offset by decreased insurance and reinsurance acquisition expenses and other underwriting expenses during both periods presented, due to the overall decline in premium volume. General and administrative expenses decreased by 7% to $58 million and were essentially flat at $116 million for the three and six months ended June 30, 2008 compared to the 2007 periods. Increases in both the three and six-month periods due to $12 million in general expenses from AFI were primarily offset by decreases in incentive compensation costs.



The effective tax rate for the second quarter of 2008 is not meaningful as White Mountains had pre-tax income of less than
$1 million. The effective rate for the second quarter of 2007 was 32%. The income tax (benefit) provision related to pre-tax (loss) income for the first six months of 2008 and 2007 represented effective tax rates of 35% and 28%, respectively. Although the majority of the Company’s worldwide operations are taxed in the United States, the Company is domiciled in Bermuda and has subsidiaries domiciled in several countries. Earnings or losses incurred by non-U.S. companies are generally subject to a lower effective tax rate than that imposed by the United States.



In the second quarter of 2006, the Internal Revenue Service (“IRS”) commenced an examination of certain of White Mountains’ U.S. subsidiaries’ income tax returns for 2003 through 2004. On June 30, 2008, the Company received Form 4549-A (Income Tax Examination Changes) from the IRS relating to the examination of tax years 2003 and 2004. The IRS is asserting that subsidiaries of the Company owe an additional $90 million of tax. The estimated total assessment, including interest, withholding tax and utilization of tax credits is $174 million. The Company disagrees with the adjustments proposed by the IRS and intends to vigorously defend its position. The timing of the resolution of these issues is uncertain, however it is reasonably possible that the resolution could occur within the next 12 months. An estimate of the range of potential outcomes cannot be made at this time. The Company does not expect the resolution of this examination to result in a material change to its financial position.



I. Summary of Operations By Segment



White Mountains conducts its operations through four segments: (1) OneBeacon, (2) White Mountains Re, (3) Esurance and (4) Other Operations. White Mountains manages all of its investments through its wholly-owned subsidiary, WM Advisors, therefore, a discussion of White Mountains’ consolidated investment operations is included after the discussion of operations by segment. White Mountains’ segment information is presented in Note 11 to the Consolidated Financial Statements.

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